Most Popular ArticlesJune 2, 2009
Nor does Bogle think that the endowment model, practiced by Yale and other large institutions, will thrive. “I have argued with David Swensen that you can’t get 15% returns forever. It’s not in the cards,” he said. But he acknowledged that Yale was way ahead of where it would have been, had it not taken such a risky strategy.
One asset class took the full force of Bogle’s criticisms. “Commodities don’t belong in anybody’s portfolio at any time for any reason,” he said.
Stocks and bonds are investments and generate an internal rate of return. For commodities that return is zero, according to Bogle. “It is a total speculation. You can make money by speculating, and someone else will lose,” he said. “Look at gold - with no internal rate of return, it has not matched Treasury Bill performance. It is not investing, it is a gamble.”
Bogle took aim at another asset class – private equity – which he said was responsible for many of the problems faced by practitioners of the endowment model. Private equity investors are now being forced to invest through “cash calls” at precisely the wrong time – when the rest of their portfolio is losing value. Bogle said there are a lot of sellers of private equity, and not a lot of buyers.
“I have never felt more confident in my beliefs and strategies than at this very minute. Indexes are down but outperformed most active managers. The difficulty of picking active managers is apparent from analysis of fund returns versus investor performance,” Bogle said. Mutual funds that achieve reasonable performance have a performance gap – fund returns outpace returns earned by investors. That gap grows as you get to more speculative funds, like energy and real estate.
Bogle said he has never seen a time in his career when it was more difficult to value the market. “The problem is we don’t know the earnings. Reported and operating earnings have diverged over the last 25 years, and reported earnings are always lower,” he said. Bogle claims he doesn’t know what earnings are or how they are calculated. Valuation based on cash flow is no better, since companies don’t always put money in their pension plan when they are supposed to.
Despite this barrier to determining valuations, Bogle estimated that equity returns should average approximately 8% annually, based on 3.5% dividend yields, earnings growth of 1-2% in real terms, 3% inflation, and some contraction in P/E ratios. A mix of Treasury and corporate bonds will yield 5%, and Bogle said the “odds are highly probable that stocks will outperform bonds.”
“Don’t bother with money market mutual funds,” according to Bogle. With yields of less than 25 basis points, investors should choose short term bond funds instead.
“I love municipal bonds, with a caveat,” Bogle said. He is worried about municipalities losing revenue with their pension plans being stressed. Investors should buy very high quality bonds and should be highly diversified (through a fund with at least 1,000 holdings) and should do this using the lowest cost municipal bond fund that meets these criteria.”
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